Banks at crossroads as landscape changes fast

Banks will need to go back to the drawing board if results for the third quarter are anything to go by. The numbers cannot be more revealing; that big players have on average shed up to a quarter of their revenues relative to a similar period a year ago with other previously profitable names sliding into loss territory.

Experts are wondering whether this significant retreat in performance is a mere short-term cost of adjustment, permanent or even the beginning of a terminal decline of banking as we know it.

The performance comes after the enactment of interest rate caps law with some analysts feeling that it may be necessary to review what these controls portend for banking and the economy as a whole.

Central Bank of Kenya Governor Patrick Njoroge while pronouncing MPC position on the rate reiterated his oft-stated position that for lenders to survive, they need to adopt new business models.

Going forward, who has the readiness to weather the rate cap storm, IFRS 9, digitisation and survive, and thrive, and who won’t?

“Predictably, with their core interest income constrained by rate caps and the fight for deposits raising cost of funds, banks that will prevail will be those that most capably deliver on cost containment,” Co-operative Bank of Kenya chief executive Gideon Muriuki told Smart Company last week. He said rate caps mean banks can ill afford to book non-performing loans.

“Therefore maintaining a clean loan book with extremely low non-performing loans will be the second major differentiator between success and failure,” he said.

According to him, alternative funding is an option to manage the capital question, including the sourcing of long-term finance through equity capital-raising or long-term lines of credit from international lenders.

He also vouches for digitisation, which offers promise of improving the quality of customer service, sharpening product delivery, harvesting customer insight, managing delivery costs and tapping new client segments.

“It is not expected that banks will have similar approaches to digitisation. However, winners will be those that retain fidelity to delivering a fulfilling customer experience,” said Mr Muriuki.

“It was almost intuitive that we executed our transformation process just before the rate caps came into being. The lean and frugal business model the bank has since adopted has helped it build significant resilience against such shocks.”

Dr Njoroge agrees with his call to lenders to adopt innovative solutions to deal with customer needs. “What is clear is that the banking model that has been there for some time is not relevant. What is called the brick and mortar is not as relevant as it was in 2003,” says Dr Njoroge.

According to KCB Group chief executive Joshua Oigara, the most notable development in Africa has been the fact that the majority of indigenous banks have now overtaken the traditional global financial institutions due to liberalisation, institutional and regulatory upgrades and technology that have transformed financial systems.

“Today, most countries have deeper and more stable financial systems, thanks to innovations that have helped Africa leapfrog more traditional banking models. The banking sector in particular has benefited from the rapid penetration of mobile technology across the continent with Kenya being a frontrunner in this space,” says Mr Oigara.

“Such technological advancements are not just shaping how people interact with one another; they are also changing the behaviour and expectations of customers who are increasingly becoming used to the immediacy offered by technology,” he adds

Mr Muriuki says Co-op bank has made a deliberate decision to continue lending adding that retreating from lending to manage rate caps shock, while understandable, will hurt customers, which will in turn hurt the bank in the long term.

Rich Management chief executive Aly Khan Satchu cautions banks that they must change with the times. “I am not bullish on a quick fire repeal of the rate cap Act so I expect this new normal to remain in play for longer,” he says.

“Clearly the big macro theme is around digitisation but digitisation has become increasingly commoditised. The secret sauce is around Artificial Intelligence and how banks interrogate the torrents of customer data....AI is surely an optimal career path,” says Mr Satchu.

Mr Daniel Kuyoh, a senior investment analyst at Alpha Africa Asset Managers says it’s not all gloom and banks are in a prime position to innovate and navigate the current environment that they are in.

“When you look at the interest rate cap, it probably is not a permanent situation in the long-term but it will persist and banks have to respond adequately to it. Key thing for them is to begin to drum out synergy with related sectors such as insurance, retail and investments,” Mr Kuyoh says.

“What customers are looking for right now is value-addition. So if banks can provide products with significant value-add for the client then they will move away from the pack that sticks to traditional banking methods.”

Banking analyst Marubu Munyaka says banks that will have a competitive edge are those that will embrace the “structured finance approach” where a bank would not require any collateral but will control cash flow.

“This is where they will operate with irrevocable letters of undertaking and / or instructions, give conditional performance bonds and make facilitation fees and commissions as opposed to interest revenue,” he says.

“They will also embrace Collateral Management Approach to Financing Commodities using the services of Collateral Managers and Independent Warehouse Operators. They would mobilise affordable funds in the global financial markets using the concept of “ Global Custodial Securities Services, etc,” says Mr Munyaka.